Economic reforms from third plenary session

By Tung Chen-yuan 童振源

At the third plenary session of the Chinese Communist Party’s (CCP) 18th Central Committee earlier this month, the party unveiled a long-awaited, ambitious plan — which had been 10 years in the making — for market reforms. It also set up a leadership group that would initiate and implement the plan, and achieve concrete results within seven years. At the same time, the party stated that future economic development should promote social justice, equality, growth, efficiency and sustainability, with market forces playing a decisive role, while the government plays the role of regulator.

The meeting focused on economic reform, but the party stressed that reform should be systemic, comprehensive and cooperative, and would cover five aspects: accelerated development of a market economy, democratic politics, cultural advancement, social harmony and an environmental culture. These reform targets are intended to stimulate labor, knowledge, technology, management and capital, so that development will be more evenly spread across the population.

The focus of economic reform is to make markets play a decisive role in resource allocation and gradually extend liberalization from the opening up of commodity markets in the past to include production factors. However, the CCP still insists that public ownership should make up the bulk of the economy. It is merely pushing for improved efficiency in state-owned enterprises, perfecting the modern enterprise system and avoiding a backlash from princelings and other powerful vested interests. This is where the reforms fall short.

The CCP hopes to establish a set of fair, open and transparent market regulations, perfect market mechanisms for determining prices, and set up a unified system for market opening and orderly competition. Above all, the party wants to establish a unified land market for urban and rural areas, develop sound financial markets and deepen high-tech system reform. In other words, it wants to create markets for production factors, such as land, capital, knowledge and technology, to avoid government intervention and influence peddling.

It was suggested at the meeting that the dual urban and rural systems was the main obstacle to uniting the two areas, and hopes were expressed that farmers’ wealth could be raised by letting workers lead farmers and urban areas lead rural areas. China is expected to gradually abolish the separate household registration systems for rural and urban areas to let agricultural workers enjoy the social welfare and guarantees that come with an urban household registration to promote urbanization, and facilitate the expansion of domestic demand and consumption. This is a goal that Chinese Premier Li Keqiang (李克強) has been pushing since he was appointed to the post. In addition, giving farmers the right to sell their land would allow them to leave rural areas and help solve the problem of rural development.

China’s state-owned banks still lead the financial system, although this will be gradually liberalized as interest rates, exchange rates and the capital account are liberalized. Interest rate liberalization will greatly improve banking efficiency, while at the same time prepare them for opening to the outside world. Exchange rate liberalization is an important way to guarantee the ability to implement macro controls and maintain control over currency policy, and it is also a premise to further liberalization of the capital account. A full opening of the capital account is a condition for making the Chinese yuan an international currency and turning China into a global financial center. This is the real purpose of establishing a free trade zone in Shanghai.